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The rich save their tax cuts

By Kay Bell · Bankrate.com
Thursday, September 30, 2010
Posted: 2 pm ET

Politics trumped policy this week. Representatives and Senators left Capitol Hill without voting on the expiring Bush tax cuts. Apparently, Congress believes that their re-election campaigns will fare better without a specific tax vote to point to.

Part of the problem, aside from the purely election-driven concerns, was that lawmakers couldn't agree on what to do about tax cuts for the wealthy.

For the Obama administration and most Democrats, the earnings cutoff for lower tax rates is $200,000 or more for individuals and $250,000 or more for households.

Republicans and some Democrats say that the current tax rates should continue for everyone, regardless of income. They argue that it would give all Americans more money to spend, which in turn will help pull the economy out of the doldrums.

It's true, says a recent study by Moody's Analytics, that if the tax rates expire,  the resulting across-the-board tax increase would precipitate a double-dip recession during the first half of 2011. The hit to after-tax income, says the Philadelphia-based economic research firm, would undermine fragile consumer confidence and spending.

But, the study also says, even if the rich get to keep their lower tax rates, don't depend on them for economy-boosting spending. Tax-cut history and data from the Federal Reserve's Flow of Funds reports indicate that high-income earners prefer to save the money rather than spend it. 

That was the case in both instances of tax cuts under former President George W. Bush.

When the Bush tax cuts of 2001 took effect, cutting the top tax rate to 35 percent, the wealthy increased their savings. The saving rate for higher-income folks climbed to 2.8 percent in the first quarter of 2002, compared to minus 2 percent in the second quarter of 2001.

With the next round of tax cuts in 2003, the rich again increased their saving ways. The saving rate this time climbed to 7.6 percent in the first quarter of 2004; in the previous quarter it had been 2.2 percent.

The tendency of the rich to save is also why the Obama stimulus targeted lower-wage earners, as well as retirees on fixed incomes. Those folks need the money they get from tax savings to have cash for day-to-day expenditures.

What does affect spending by the wealthy, and why are they holding onto their cash right now? According to Moody's Analytics' research, the rich are more likely to open their wallets based on what the stock market is doing than on changes in income tax rates.

Tax and savings history, along with the Moody's Analytics report, might undercut the political arguments that the tax cuts should stay in place for all taxpayers. Or not.

We'll have to wait until Nov. 2 to see if voters take the word of previous tax policy changes and economic researchers or believe what they see in glossy campaign ads.

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5 Comments
Sam
October 02, 2010 at 10:45 am

LP, you really don't understand. For me the issue is simple - if you don't pay taxes then you are part of the problem. The so called "rich" do pay taxes and thus are doing there part. It is too bad we have to support a tax and spend liberal government.

LP
October 01, 2010 at 11:39 am

Kate, let's put hypotheticals aside. Anyone making 250,000+ a year can afford to pay as much as they did before the Bush-era tax cuts took effect. With unemployment and rental prices rising, the lowest income earners cannot afford to pay more.

Mike
October 01, 2010 at 10:44 am

The article uses the verb "save" as if that's a bad thing, one that doesn't stimulate. "The Rich" didn't get that way by "saving" in a mattress. When they "save", that means INVEST. It goes in stocks, bonds, real-estate, and even into CDs and passbook accounts. All of those are means for businesses to buy facilities, and equipment, and hire employees. This is FAR more efficient, and less corrupt and favoritism, than trusting those in government to redistribute our wealth.

Kate
September 30, 2010 at 11:44 pm

Almost 50% of the lowest income earners pay 0% income taxes, many have a negative rate meaning they get more back than they pay in.

The tax brackets are already progressive so the more one makes the higher percent one pays. I'm not in the higher tax bracket, but it's not just all about what makes for stimulus...it's about creating class warfare. It's about giving the government more money to spend and often waste. It's not lack of revenue that is the biggest problem (after the Bush Tax Cuts, the IRS collected more revenues than ever in history), it's over-spending by the Federal government.

I think it's a matter of principle that we make Washington be more responsible with our money before anyone gives them any more.